Bank shares are declining even as interest rates surge, raising concerns about unusual market forces. While higher rates typically benefit lenders by widening the gap between what they charge borrowers and pay savers, the Stoxx sub-index of large European banks has fallen 7% since early September. Rising mortgage costs, such as the UK's 5-year fixed rate surpassing 6%, may dampen loan demand.
Additionally, a 'bear flattener'—where short-term rates outpace long-term ones—hurts profitability since banks borrow short and lend long. Competition from fintechs and AI tools like Meta's Muse intensifies pressure on deposit rates, forcing banks to pass more of the rate hikes to savers. This 'deposit beta' will be a key focus during upcoming earnings reports.
Analysts at Keefe, Bruyette & Woods argue that rising deposit and loan costs in Europe could limit margin pressure, while Deutsche Bank's Raja Akram expects higher income from rate moves. Strong corporate loan growth in the Eurozone, driven by defence and infrastructure investments, suggests durable demand. With valuations now more modest, Europe's banks have outperformed the market for five consecutive years and may extend that streak.
Source: Financial Times Companies · Summarized by HeadlinesBriefing